EPFO may struggle to meet 8.5% interest rate commitment

The Employees’ Provident Fund Organisation (EPFO), the retirement savings manager, may fail to keep its commitment to pay an 8.5 per cent return to its 60 million subscribers in 2019-20 because of the bloodbath on the stock market sparked by investor worries over the impact of the novel coronavirus.

EPFO could not
redeem a large portion of its Rs 95,500 crore of investments in exchange traded
funds (ETFs) before the equity market went into bear market territory following
the World Health Organisation’s March 11 characterisation of the coronavirus as
a pandemic, three people with direct knowledge of the matter said.

At the meeting of
the Central Board of Trustees (CBT) on March 6, EPFO officials told the apex
decision-making body that investments from government securities and bonds
would be enough to provide an 8.15 per cent return to subscribers; the balance
0.35 per cent will be paid by encashing ETFs, the people present in the meeting
said. CBT, a statutory body chaired by the labour minister, has representation
from the industry and labour unions.

“The assurance of
0.35 per cent on March 6 was on a notional basis as the market was up the
previous day, when the agenda for the CBT was circulated,” one of the

people said.

The BSE Sensex and the National Stock Exchange’s Nifty on
March 5 closed 0.16 per cent up at 38,471 points and 11,269 points,
respectively. The market fell 24 per cent between March 6 and March 19. On
Thursday, Sensex closed 2.01 per cent down to 28,288 points and the Nifty
declined 2.42 per cent to 8,263 points.

Some CBT members
said they could not understand most of the agenda items, including returns on
investments, for lack of sufficient time and several important issues couldn’t
be adequately discussed.

“The agenda was
circulated on March 5, a day before the meeting. There were 31 agenda items.
The agenda documents ran into three volumes and more than 1,000 pages. It is
not humanly possible for anyone to understand financial nuances in just a day
and deliberate on these matters in the 3-4 hours meeting,” said CBT member and
Hind Mazdoor Sabha (HMS) general secretary Harbhajan Singh Sidhu.

People present at
the meeting confirmed that the lack of sufficient time to devote to matters on
the agenda was raised at the CBT meeting and labour minister Santosh Kumar
Gangwar assured members that the agenda would be distributed to them 15 days in
advance of future meetings.

Spokespersons for the labour and finance ministries,
Gangwar, and EPFO financial adviser Hemant Jain did not respond

to queries.

The government
cannot reduce the interest rate decided on March 6, said Virjesh Upadhyay, a
CBT member and general secretary of the Bharatiya Mazdoor

Sangh (BMS).

“CBT has already taken a decision based on the fund we
have and that decision is final,” said Upadhyay, who was , not present at the
March 6 meeting.

The rate of
return EPFO pays it subscribers needs to be approved by the finance ministry to
become effective. Sidhu said the administration of EPFO needs to be streamlined
and CBT members should be given detailed presentations before they take a final
call on

important matters.

It was only in
2015 that the labour ministry allowed EPFO to invest in equity while capping
the exposure at between 5 per cent and 15 per cent of its corpus . The CBT, on
March 31, 2015, decided to invest 5 per cent of EPFO’s total annual investments
in ETFs of Nifty-50 and Sensex; the actual investment started on August 5 that
year. The exposure to ETFs was raised to 10 per cent on September 12, 2016 and
15 per cent on May 27, 2017, a government official said, requesting anonymity.
HT